Thursday, 17 January 2013

Something else to blame on Bankers

Worries about a decline in productivity growth
can also be pegged on a common villain

A popular topic these
days among economists is to point to a decline in improvements being made by
new technologies. The claim is that the
most substantial inventions such as electricity, telephones, cars and planes,
and even the humble toilet are all things from the past and further innovations
are either more difficult to bring into fruition or the economy is less geared
to coming up with new gadgets. The
result of a lack of progress is that growth in productivity (for example, what
each worker can produce in an hour) has been in decline since a peak around
1970. Some counter arguments include
that it takes time for new ways of doing things, such as making the most of the
Internet, to have considerable influence on our lives and that the effects
build up over time to make bigger and bigger contributions to
productivity. But there is one obvious
culprit that is overlooked – the finance sector which not only caused damage to
the global economy by collapsing in a crisis of its own making but also may
have contributed to the slowdown in innovation by side-tracking the best and
brightest of a generation and this is another reason to clamp down on the excesses
of the banking industry.

To make a case against
the finance sector, it is useful to consider how new inventions come into being
in the first place. Some happen just by
chance but inventions typically require a significant amount of money and
effort. A system where this money and
effort is rewarded is seen as being necessary to induce individuals or
companies to invest their resources in such activities. Individuals and companies will also have
other options in terms of where to apply themselves and will only choose to
undertake the development of a new technology if the rewards are deemed to be
high enough. Furthermore, it could also be
argued that even more effort is required to come up with something new as the
considerable amount of knowledge that has already amassed in different fields
means it takes a big investment in time to become an expert in any field.

Yet, in contrast to
this, imagine a new industry where smart and ambitious people could make previously
inconceivable amounts of money relatively easily compared to other pursuits -
this is finance. Deregulation of the
banking sector which kicked off in the 1980s and picked up speed in the 1990s
created an environment where clever minds could come up with new financial
products which would make themselves and their employers very rich. This innovation within finance allowed for
increased borrowing which would have boosted the global economy by enabling
better use of limited savings and lowering interest rates. With ordinary people also benefiting through
cheaper and more available mortgage lending, the banking sector had created a
boom that everyone wanted to continue. But
the rapid increase in lending needed to be kept in check and it has become
obvious in hindsight that debt level rose too high with disastrous
consequences.

As well as the global
financial crisis in 2008 and 2009, the excesses of the banking sector may have
also attracted talented individuals away from efforts to push forward the
boundaries of progress. Money and effort
are key ingredients in innovation but many of the ideas which are the origins
of something new come from a curious and creative person. But with many of the sharpest minds lured in
by the lavish rewards in banking, there would be fewer innovative ideas being
realised outside of finance. If the
resulting creativeness had borne fruit in the form of faster growth, putting
the best brains to work in banking would have been worth it. But as we now know, the outcome was
completely the opposite.

Along with the perils
of excessive lending, the misuse of one of the most valuable resources
available with dire results is another reason why banking should be limited in
its scope. Making money from money is
easy compared to what is required to make a success out of a new product or
service so the rewards for innovation need to be higher in areas which will
make a substantial difference. But for
all of the reasons to clamp down on the finance sector, it is still a crucial
part of the economy and too many restrictions on banking could be even worse
than too few (refer to Another Reason not to Bank on Europe for more on this argument). The bankers have been bad but we were all
enjoying the party.

1 comment:

For more about declining innovation seehttp://en.wikipedia.org/wiki/The_Great_Stagnationhttp://www.economist.com/news/briefing/21569381-idea-innovation-and-new-technology-have-stopped-driving-growth-getting-increasing